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Term structure transmission of monetary policy

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  • Kozicki, Sharon
  • Tinsley, P.A.

Abstract

Under bond rate transmission of monetary policy, standard restrictions on policy responses to obtain determinate inflation need not apply. In periods of passive policy, bond rates may exhibit stable responses to inflation if future policy is anticipated to be active, or if time-varying term premiums incorporate inflation-dependent risk pricing. We derive a generalized Taylor Principle that requires a lower bound to the average anticipated path of forward rate responses to inflation. We also present a no-arbitrage term structure model with horizon-dependent policy and time-varying term premiums to explain mechanics and provide empirical results supporting these channels.

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Bibliographic Info

Article provided by Elsevier in its journal The North American Journal of Economics and Finance.

Volume (Year): 19 (2008)
Issue (Month): 1 (March)
Pages: 71-92

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Handle: RePEc:eee:ecofin:v:19:y:2008:i:1:p:71-92

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Web page: http://www.elsevier.com/locate/inca/620163

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Cited by:
  1. Sharon Kozicki & Peter Tinsley, 2005. "Term structure transmission of monetary policy," Research Working Paper RWP 05-06, Federal Reserve Bank of Kansas City.
  2. Sydney C. Ludvigson & Serena Ng, 2009. "A Factor Analysis of Bond Risk Premia," NBER Working Papers 15188, National Bureau of Economic Research, Inc.
  3. Petra Gerlach-Kristen & Barbara Rudolf, 2010. "Macroeconomic and interest rate volatility under alternative monetary operating procedures," Working Papers 2010-12, Swiss National Bank.
  4. Erdemlioglu, Deniz, 2009. "Macro Factors in UK Excess Bond Returns: Principal Components and Factor-Model Approach," MPRA Paper 28895, University Library of Munich, Germany.
  5. Kozicki, Sharon & Tinsley, P.A., 2009. "Perhaps the 1970s FOMC did what it said it did," Journal of Monetary Economics, Elsevier, vol. 56(6), pages 842-855, September.

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